energy management :: 2013/14 energy economics prof. tânia sousa [email protected]

Energy Management :: 2013/14

Energy Economics

Prof. Tânia [email protected]

Energy Management

Class # 9 : Energy Economics

What are the links between Energy and Economics? (Smil)

• There is a very high correlation between the rate of energy use and the level of economic performance – During the last century the Gross World Economic Product (GWP) has

grown almost at the exact same rate (a sixteenfold increase) that the global comercial Total Primary Energy Supply (TPES).

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– High correlation also for a single country in time

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– High correlation between per capita averages of GDP (PPP adjusted) and TPES (for 63 countries)for the year 2000

Portugal

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• Energy intensity (energy use per unit of GDP):– A measure of the efficiency of a country in using energy– Low values correspond to environmental and economic

advantages

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• Energy intensity in time:– EI rises during early stages of industrialization, its peak is

sharp and short, and then declines as mature economies use inputs more efficiently

– EI for the World rised from 11 MJ/US$ (1990) in 1900 until 1970 and declined to the initial value in 2000


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• Energy intensity for different countries in 1999:– Most countries have EI between 5 and 13 MJ/$ PPP– EI does not depend on the GDP/capita (e.g., India and

Australia have similar EI)

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• Factors that control EI:– Degree of energy self-sufficiency– Composition on primary energy supply – Differences in industrial structure– Country size– Climate HHT

MHT

Other Electric Uses

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• Problems with EI:– Treatment of Primary Electricity (e.g. Sweden vs.

Denmark) – the method of partial substitution will inflate all large-scale producers of electricity

HHT

MHT

Other Electric Uses

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• Problems with EI:– It is misleading if it counts only with commercial forms of

energy – animate labor and biomass were the most important forms of energy for most of humankind until middle of the 20th century

Greece

HHT

MHT

Mechanical Drive

Muscle Work

Light

LHT

Other Electric Uses

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What are the links between Energy and Economics?

• Problems with EI:– It is misleading if it counts only with commercial forms of

energy – animate labor and biomass were the most important forms of energy for most of humankind until middle of the 20th century

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Primary energy (exergy) / GDP (IEA + food/feed)

Final energy (exergy) / GDP (IEA + food/feed)

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Why are these links important?

• Higher energy use has higher impact on the environment:– Land use changes (surface mines, large water

reservoirs)

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• Higher energy use has higher impact on the environment:– Pollution of ocean water (seaborne transport of crude oil)

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• Higher energy use has higher impact on the environment:– Greenhouse gas emissions (combustion of fossil fuels)– Air pollution (combustion of fossil fuels)

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• Higher energy use has higher impact on the environment:– Accidental releases of radiation (nuclear power plants

and storage of radioactive waste)

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• Some energy forms such as oil are becoming more scarce/expensive

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Links Energy-Economy-Environment

• What will the economy in the future look like?

More self-reliant local economies and ways of life

Global Economy dependent on renewable energies

Similar to the present but biggerModels will help us understand the impact of energy supply & technological innovations & policy measures on the environment and the economy?

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Issues in modeling energy-economy interactions

1. Trade-offs for people between environmental quality ( with the use of energy) and income ( with the use of energy)– GDP: important factors for the quality of life such as

inequality in the society, environmental quality are related with GDP but that are not controlled only by GDP (http://www.beyond-gdp.eu/)

– http://thewanderlife.com/human-happiness-and-the-environment-address-by-uruguayan-president-jose-mujica-at-rio-20-summit/

– Other macroeconomic measures such as Genuine Savings consider depletion of natural resources and damage caused by pollution.(World Bank)

– Measures of social welfare that depend on consumption and on environmental degradation. Social welfare depends on utility of each person

http://www.beyond-gdp.eu/

http://www.beyond-gdp.eu/

http://thewanderlife.com/human-happiness-and-the-environment-address-by-uruguayan-president-jose-mujica-at-rio-20-summit/




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Utility functions: a review

• Utility functions specify the hapiness U of a person or a population as a function of consumed goods X1, X2, …:

• Examples:

• Issues:• Indiference curves (substitutability between

goods)

1 2 ....b cU aX X

1 2 ....U a bX cX

1 2min , ,....U aX bX

Cobb-Douglas Utility Function

Linear Utility Function

Leontief Utility Function

1max ( ,..., ) . .n i ii

U U X X s t X P m

x1

x2

U(x1,x2) = x1x2;

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2. How much can energy be replaced by other productive factors?

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Production Functions: a review

• Production functions specify the output Q of an economy as a function of inputs X1, X2, …:

• Examples:

• Issues:• What are the relevant production factors (K, L, E, M, T, ….)• How much are they substitutable?

1 2( , ,...)Q f X X

1 2 ....b cQ aX X

1 2 ....Q a bX cX

1 2min , ,....Q aX bX

Cobb-Douglas Production Function

Linear Production Function

Leontief Production Function

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2. How much can energy be replaced by other productive factors?– Production functions that have energy as a production

factor, e.g., LINEX (Ayres):

exp ( ) 2 ( ) ( ) 1L U L

Q AU a t a t b tK U

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– Technology improves efficiencies but there are strict thermodynamic limits to primary-to-final and final-to-useful efficiencies;

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Aggregated 2nd Law efficiencies

• Aggregated 2nd Law efficiencies have increased and currently range between 16% - 23%

Finland

Ireland

BelgiumSpain

Sweden

Portugal

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2nd Law efficiencies vs. Final Exergy Uses

• The• The aggregated 2nd law efficiency of Ireland is

lower because it has a higher fraction of LHT and a lower mechanical drive efficiency

HHT

MHT

Mechanical Drive

Other Electric Uses

IrelandGreece

HHTMHT

Mechanical Drive

Muscle Work

Light

LHT

Other Electric Uses

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2nd Law efficiencies vs. Final Exergy Uses

• The• The aggregated 2nd law efficiency of Ireland is

lower because it has lower 2nd law efficiencies for LHT, MHT and mechanical drive.

HHT

MHT

Mechanical Drive

Other Electric Uses

Ireland

HHT

MHT

Mechanical Drive

Muscle WorkLight

LHT

Other Electric Uses

Finland

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• There are no thermodynamic limits to UW/GDP – what about empirical evidence?

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al exerg

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J/2010 €

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Final. Exergy / GDP(MJ/2010 €)

Useful Work / GDP(MJ/2010 €)

(GDP series from Lains,, 2003, & European Commission)

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3. How much are different forms of energy replaceable by each other?– Transport is the most problematic use

– Possibility of replacing oil liquids in internal combustion engines by more efficiency, other fossil (coal-to-liquids, tar sands, oil shale) or renewables (ethanol, biodiesel)

Electric cars (driving range; Recharge time, 4 to 8 hours, battery cost, bulk & weight)

Hydrogen cars (hydrogen infrastructure and cost, cost)

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4. What is the energy that really matters (primary, final, useful, productive or useful work)?– During the twentieth century the quantity of final energy

taken from one unit of primary energy has doubled or even tripled

– The energy that is more intimated related with productivity is the productive energy but this is also the most difficult one to quantify

– What about the energy used for non-productive activities?


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5. Investment in renewable energies and energy efficiency technologies – Depends on the price of fossil fuels;– Controls conversion efficiencies between primary, final

and useful energy;– Controls price of renewable energies;

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6. Oil Price– Depends on demand vs.supply– Depends on speculation in financial markets;– Controls behavior of energy firms (e.g., investments in

new oil fields)

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7. The amount of fossil fuel reserves – Depends on technology (e.g., shale gas)– Energy game changers such as accidents (Japan, 2011)– Reliable information about depletion rates

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City ON – an energy-economy model

• Energy (electricity) is the only production factor

• Electricity has both a productive (industry and services consumption) and non-productive (residential and municipal consumption) role

• Services and industry produce added-value to the economy as a whole

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City ON – na energy-economy model

• The central planner splits income between building power plants, technology development, resources (constant prices) and consumption

• Households have an utility function that depends on pollution generated by the electricity production sector and useful consumption

• Transformation between final and useful consumption depends on efficiency

• A central planner has to keep people happy (high useful consumption + low pollution)

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• Power plants can be renewable and non-renewable.

• Non-renewable power plants pollute & Renewable plants depend on wind, sun and water availability

• Characterizationof power plants and technology development (& investment) were realistic

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• This model was used by Biodroid to develop a serious game to EDP– http://www.cityon.pt/en

• It was applied to Portugal with some adjustments to forecast optimal electricity production & GDP evolution– Supply should have a more

relevant role for renewables due to environmental impacts.

http://www.cityon.pt/en

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Energy Wars – an energy-economy model

• Introduce more production factors

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• Introduce more production factors (labor, capital and technology)

• Introduce energy scarcity to simulate dependence of economic growth on energy

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• Introduce more types of energy (at least oil & renewable electricity) to simulate whether the economy can make a smooth transition between fossils and renewables

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• Introduce mechanisms that are relevant for the oil price formation (speculation, decisions on investments by energy firms, decisions of oil consumption by non-energy firms and households)

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• Introduce mechanisms that are relevant for the oil price formation (speculation, decisions on investments by energy firms, decisions of oil consumption by non-energy firms and households)

• There is no central planner to make decisions, i.e., households, the energy sector and the non-energy sector have internal dynamics

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Energy Wars: The macroeconomic model

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Were do Energy Companies Invest?

Research

Oil & Gas Renewables

StorageFinancial Market

Energy Wars – An agent based model for energy firms

• Companies have to deal with huge investements lags: 7-10 years• Hydrocarbons scarcity push Oil&Gas companies to renewables• Market Structure: Oligopolist

– Very capital intensive industry > Few companies control the market

Model : hydrocarbons depletion

renewable penetration

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Energy Wars – An agent based model for the financial market

• A limited number of intelligent, but boundedly rational financial agents;

• Agents use different heuristic trading rules to buy or sell oil future contracts;

• Fundamental rules: use real variables such as change in oil stocks or GDP growth to predict future oil prices

• Technical rules: use historical price series to predict future oil prices

• From the mismatch of supply vs. demand emerges a price

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Energy Wars – Interaction between models

Macroeconomic model

Agent-based financial model

Agent-based energy firms model

Oil Price

GDPOil Stock changes

Oil Supply

Oil Price

Interest rateGDP

energy management :: 2013/14 energy economics prof. tânia sousa [email protected]

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